As Congress and the New York legislature consider revising special education laws, the issue of education for disabled children is being shaped by an alarming increase in special education enrollments. Nationwide, special education is now approaching almost 13% of all students; in New York, its approaching 14%. This explosive growth is producing demands for increased subsidies for special education.

But before we rush to increase the subsidy, it is important to understand what is causing this growth. Some people say there really are more disabled children. Others suspect that high stakes tests are driving schools to push low performing students into special education. But a new study released by the Manhattan Institute finds that the most important culprit for the rise in special education is the set of financial incentives produced by the way special education is funded in most states.

The funding system used in New York and most other states, which some education officials candidly refer to as “the bounty system,” pays school districts more for each additional student diagnosed with a disability. This provides a perverse financial incentive for schools to diagnose more students. By comparing the rates of growth in special education enrollment in states with and without the bounty funding system, we find that 62% of the increase in special education during the 1990s in states with the bounty system can be attributed to these financial incentives. Nationwide, this represents roughly 390,000 extra students placed in special education because of the bounty system, resulting in additional spending of over $2.3 billion per year. In New York, it would represent over 44,000 extra students and additional spending of more than $260 million.

While we would like to think that something as important as placing a student in special education would be immune to financial considerations, the hard reality is that incentives alter peoples behavior. If it is financially advantageous to move students into special education, school systems will seek to influence the rate at which students are diagnosed. And it is no coincidence that the overwhelming majority of the growth in special education has taken place in the “specific learning disability” category, which is both among the most subjective disabilities to diagnose and the cheapest to serve.

If it were true that there really are more disabled children because of changes in the environment or medical technology, then we would expect increases in all sorts of disabilities. In fact, enrollments for disabilities that are more objective to diagnose and more expensive to treat have been either declining or essential flat for 25 years. Nor are high stakes accountability systems responsible for the increases in special education. We compared the growth of special education enrollments in states with and without high stakes testing and found no relationship between growth in special education enrollment and testing.

Some educators are sure to object that financial incentives cannot explain the rise in special education because the cost of providing services to disabled students far exceeds the bounties they bring in. However, much of the money that is labeled as special education spending is actually money that would have been spent anyway. For example, if a school hires additional instructors to tutor students who are behind in reading, that comes out of the regular school budget. But if those students are reclassified as learning disabled, that spending becomes special education spending, and is now subsidized by the state. The best proof that financial incentives matter is that special education has been growing much faster where those incentives are present.

What can be done? Obviously, the best solution would be for New York and the other bounty states to follow the lead of the sixteen states that have dumped the bounty system in favor of funding systems that dont create perverse incentives. Another solution would be to emulate Floridas popular McKay Scholarship Program, which provides vouchers to disabled students. This would mitigate perverse financial incentives, since placing a student in special education would not automatically bring more money into a school districts budget.

Obviously, no one wants to return to the days when public schools regularly denied admission to students with disabilities. But Congress and the New York legislature and the states would be wise to consider how the subsidies that enticed schools to provide services to disabled students might also entice massive levels of misdiagnosis if proper checks are not in place. Pouring more money into the same old system would only make the problem that much worse.